Does your business pay the correct amount of tax?
Small businesses that don’t pay enough tax will find their business trades at a discount when it comes time to sell.
Businesses that are not recording tax accurately, do themselves a disservice when they go to sell their enterprise, given the price an acquirer is prepared to pay is typically based on a multiple of annual revenue/profit recorded in the tax returns. Reducing this figure for tax purposes can come back to bite down the track.
Most small businesses do the right thing regarding their tax obligation and legitimately claiming maximum available deductions is a sensible thing. However, not disclosing all income, exaggerating expenses, claiming personal expenditure as business expenses and operating outside the system will not only affect your ability to sell, but also your ability to get finance from lenders.
So some tips:
- Good records are easily kept by using a software system to record income and expenses so you can include all information at year end.
- It is important to keep business and personal records separate, and a simple way to help that is to keep business and personal (different) bank accounts and having designated credit or debit cards for business.
- Cash jobs can seem like a good idea, but they end up causing issues for both business and customer. The consumer isn’t covered should there be any issues with the work as they have no receipt and the small business industry loses out as it drives prices lower. With ATO matching, these transactions can be identified more readily also.
- Try to think about tax as a good thing… if you are paying tax, you are making a profit. After all, we are all in business to make a profit and provide for our families.
- Think about your long term goals, like improving your own personal financial situation… expanding your business, a new house, investments, funding kids’ education or even an overseas holiday. Often these will need the support of bank… don’t shoot yourself in the foot with unreported income or over claiming of deductions. The banks will only rely on what you are prepared to show in your tax return. We have seen poor decisions cost people many times in the past… saving a bit of tax, cost them their dream property.
- Put aside funds regularly to cover your tax/PAYG Instalments. It is then not a serious cashflow issue when the payment is due. The key is tax planning and budgeting early.
Industry leaders also agree….
Trent Innes, managing director of accounting software Xero, identifies two classes of people who do not pay enough tax those who do it deliberately and those who don’t.
“The people who are not deliberately going out of their way to do the wrong thing are, often unaware or uneducated. These people should hire an accountant or bookkeeper. They can help small business owners meet their obligations and ensure that they pay the right amount of tax.”
“If you’re not recording the right amount of revenue, you’re not going to get full value. It will also be a problem when you want to raise capital or go to the bank and borrow money.”
Council of Small Business Australia CEO Peter Strong says that the ATO has enhanced resources to identify whether business owners have made an honest mistake or are intentionally dodging tax. “But there are complex areas of the tax system where it’s easy to make a mistake.
“Fringe benefits tax is one, the line between whether someone is an employee or contractor is another. It’s a problem for a business ifs contractor is deemed to be an employee after a number of years, and it suddenly has a large superannuation bill to pay,” he says.
Mr Strong says there are advantages in not encouraging customers to make cash payments which may help reduce tax evasion.
He also urges businesses to use electronic invoicing so they can verify their financial information to the ATO, and to be honest when claiming expenses as deductions. “That’s one of the best ways to show you’re doing the right thing,” he said.